Originally written August 18th, 2022:
Imagine a home goods store in your town is up for sale. It generated $100,000 in sales over the last year from bath towels and wicker baskets, though this number has been falling each year as fewer people visit the store. The store doesn’t make any money on these sales. It burns cash, actually: roughly $10,000 down the drain over the same time period after expenses. Cash flow had been slightly positive the year before (about +$1,000), but this figure has also been falling every year in an ominous way.
So, the store is up for sale. You’re sitting on a pile of money. What would you pay for it? Would you even want to buy it? Flipping the real estate won’t work: the physical space is leased, and subject to the same rent inflation that’s present everywhere else in the U.S.
You might say to yourself that you’re not interested at all, since the absence of profit won’t provide any return on investment, and you’ll likely lose some or all of the money you invested to purchase it. This is a very reasonable take.
Right now, however, a group of investors is eager to buy the company for around $70,000 (or 70% of the company’s annual sales), despite the stats above.
This hypothetical scenario, of course, is actually playing out right now with the stock of Bed Bath & Beyond (BBBY). After a prolonged period of significant revenue declines (down about 40% from 2019 levels), BBBY shares have rallied back aggressively this summer.
Do you think this move is justified? Do you think the business will capitalize on this opportunity to raise equity and keep the business afloat? Do you think there is an operational turnaround on the horizon? Let us know.